The January employment report was a complete snow job. Abominable winter blizzards across the country caused 886,000 workers to report "not at work due to bad weather," according to the Bureau of Labor Statistics. This is 600,000 more than the normal 300,000 not at work for the average January of the past decade.

So the bad weather has distorted the numbers. The actual 36,000 increase in non-farm payrolls and the 50,000 gain in private payrolls really don't have a snowball's chance at being accurate. The 1 million people in January who wanted a job but didn't look for one because of "other" reasons hints again at the bad-weather distortion. So does the 4.9 million jump in the part-time workforce.

As for the 9 percent unemployment rate, it's not likely to last as more people are recorded re-entering the labor force in the months ahead. The household employment survey (on which the unemployment rate is based) increased 117,000 in January, following a near 300,000 gain in December.

On the plus side (if anything can be believed in these numbers), average hourly earnings increased by 0.4 percent -- a much bigger gain than in recent months. Over the past year, wages are rising 1.9 percent.

But here's a key point: Manufacturing jobs in January rose by nearly 50,000. That's consistent with the blowout ISM manufacturing report for January published a few days ago. Manufacturing has been the biggest surprise in the recovery. Additionally, the ISM non-manufacturing services report was also gangbusters for January.

These reports are more accurate and more significant than the jobs calculation. And if you piece them together with record-breaking profits, which are the mother's milk for stocks, business and the whole economy, it's hard not to conclude that the pace of recovery is actually picking up steam -- despite the lackluster jobs performance.

The downside of the upside is mounting inflation pressure. Both ISM reports registered very strong prices paid. Those outsized price increases are picking up the huge commodity-price increases that Ben Bernanke continues to ignore.

Bond-market rates have moved up to 3.64 percent for the 10-year Treasury and 4.73 percent for the 30-year. Those rising yields are signaling inflationary growth. Along with soaring commodity prices, the abnormally steep Treasury yield curve is signaling the Fed to stop creating new dollars with its QE2 pump-priming.

Right now, stronger economic growth, higher profits and rising inflation continue to help the stock market, which actually increased after Friday's weird jobs report. But the risk here is that reported inflation for the CPI may rise faster than anyone thinks. And that could take a bite out of stocks and the recovery.

GM posts the Gallup data, unemployment at 10.3% and so-called U6 the larger measure at 19.7% and asks: "**Whom to believe?"

The government publishes two main measures, the unemployment rate from BLS and another figure measured completely differently the household survey from the Census Bureau. The Gallup figure gives you a third source.

Serious answer on economic data is trust none of them precisely. More practical is to use all of them for trends from previous measurements, commonalities, differences, being careful to know how they measure and what the weaknesses or flaws are. A good opportunity to remember that all economic data is loaded with measurement errors. Best follow up is to read economists you learn to trust who watch this closer than we do and see how they analyze what comes in. On this board those have become Brian Wesbury and Scott Grannis who are honest about numbers published, separate from having their own take on the future. Other sources of analysis: look at the Fed's own analysis or look to other economists.

Simple answer to unemployment numbers is that they are too damn high by more than two-fold; tenths of a point are not significant. U6 is an interesting measure including underemployment, or to measure by sub-group like black teenagers, or by state: MN is in the 6% range and ND is 3.5, meaning the colder it is the harder people work, or just some states lure in fewer lazy, confused workers than others.

My favorite economic quote of the last year was that our economy needs to generate x number of (many, many) new start up companies every year that grow to a billion dollars. While I was dithering about whether the economy would go up or down, my tennis partner founded, built from scratch a storage networks company and just announced the sale of his suburban Mpls company to Dell for 960 million. Part of that economic story is that to build a data storage product for medium sized companies with success and have 140 million in the bank in this economy means that someone out there is making capital investments if you have a product that delivers what they need.http://www.itweb.co.za/index.php?option=com_content&view=article&id=40374%3adell-to-snap-up-compellent&catid=77These stories are too few and far between, but I am grateful that it is still possible.

Retail sales and sales excluding autos both increased 0.3% in January. Both fell slightly short of consensus expectations.

Including revisions to November/December, sales were up 0.2% in January while sales ex-autos were unchanged. Retail sales are up 7.8% versus a year ago; sales ex-autos are up 6.2%.

The increase in retail sales for January was led by grocery stores, gas stations, department stores and warehouse clubs, internet/mail-order, and autos. The weakest category of sales, by far, was building materials.

Sales excluding autos, building materials, and gas increased 0.4% in January, but were unchanged including downward revisions for November/December. These sales are up 5.1% versus last year. This calculation is important for estimating GDP.

Implications: Today’s report on retail sales was lukewarm. Sales increased less than the consensus expected and were revised down slightly for prior months. However, the modest growth in sales in January was primarily due to one category – building materials – which was held down by the unusually harsh winter weather in much of the country. Most major categories of sales increased in January. Despite this, “core” sales, which exclude autos, gas, and building materials (all of which are volatile from month to month) increased a healthy 0.4% and were up for the 15th time in the last 18 months. We expect consumer spending to continue to move higher. Worker earnings are up, consumer debt has stabilized at much lower levels, and consumers’ financial obligations are now the smallest share of income since the mid-1990s. In other news this morning, the Empire State Index, a measure of manufacturing activity in New York, increased to +15.4 in February from +11.9. On the inflation front, import prices increased 1.5% in January and are up 5.3% in the past year. Excluding petroleum, import prices increased 1.1% in January and are up 3.2% versus a year ago. Export prices rose 1.2% in January and are up 6.8% in the past year. Excluding farm products, export prices still gained 0.9% in January and are up 5.3% from a year ago. These widespread gains in trade prices are a leading sign of higher inflation that will ultimately hit the US consumer.

More interesting of course if not for him being banned by law from ever saying anything at all about a publicly traded company. It is a great story. Thanks for having a place to share it. They were a rumored takeover target for 2 years.

The anti-capitalists will say that his share is more than anyone deserves, but what the economy needs is for him to do it again, this was this 3rd startup success, and for people everywhere to be inspired by success and give it a try.

Due to a 0.7% decline in mining and a 1.6% drop in utilities, industrial production fell 0.1% in January. Including upward revisions to prior months, production increased 0.2%. The consensus expected a gain of 0.5%. Production is up at a 5.1% annual rate in the past year.

Manufacturing, which excludes mining/utilities, was up 0.3% in January (+0.8% including upward revisions to previous months). The gain in January was led by auto production, which increased 3.2%. Non-auto manufacturing increased 0.1% and was revised upward for prior months. Auto production is up 5.4% versus a year ago while non-auto manufacturing has risen up 5.5%.

The production of high-tech equipment was up 1.1% in January, was revised up for prior months, and is up 13.7% versus a year ago.

Overall capacity utilization slipped to 76.1% in January. Manufacturing capacity use increased to 73.7%, the highest since August 2008.

Implications: Today’s headline decline of 0.1% for industrial production is not something to worry about. The fall was largely due to a decline in mining (which is normally volatile) and utilities (January was not as unusually cold as December). Including revisions to prior months, industrial production was up 0.2%. Manufacturing is still a bright spot, expanding for the 7th consecutive month at a healthy 0.3% pace in January (+0.8% including upward revisions to prior months). Auto manufacturing surged and should continue to add to production growth in the coming year as autos sales rise. Industrial production is going to continue to move higher and will likely keep being led by business equipment. Corporate profits are approaching a new record high and cash on the balance sheets of non-financial companies – earning nearly zero percent interest – had already reached a record high. Now, finally, Bloomberg is reporting that S&P 500 companies are starting to reduce their cash hordes and increase capital spending more rapidly. It makes sense that these larger companies take the lead given that they have access to the capital markets (through bond sales) and are better able to get a bank loan when they need one. Commercial and industrial lending is now up three straight months, a far cry from the 20% year-over-year declines of early 2010.

Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.

The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that “a three-phased attack was planned and is in the process against the United States economy.”

While economic analysts and a final report from the federal government's Financial Crisis Inquiry Commission blame the crash on such economic factors as high-risk mortgage lending practices and poor federal regulation and supervision, the Pentagon contractor adds a new element: “outside forces,” a factor the commission did not examine.

“There is sufficient justification to question whether outside forces triggered, capitalized upon or magnified the economic difficulties of 2008,” the report says, explaining that those domestic economic factors would have caused a “normal downturn” but not the “near collapse” of the global economic system that took place.

Suspects include financial enemies in Middle Eastern states, Islamic terrorists, hostile members of the Chinese military, or government and organized crime groups in Russia, Venezuela or Iran. Chinese military officials publicly have suggested using economic warfare against the U.S.Michael G. Vickers, assistant secretary of defense for special operations, said the Pentagon was not the appropriate agency to assess economic warfare and financial terrorism risks. (Associated Press)Michael G. Vickers, assistant secretary of defense for special operations, said the Pentagon was not the appropriate agency to assess economic warfare and financial terrorism risks. (Associated Press)

In an interview with The Times, Mr. Freeman said his report provided enough theoretical evidence for an economic warfare attack that further forensic study was warranted.

“The new battle space is the economy,” he said. “We spend hundreds of billions of dollars on weapons systems each year. But a relatively small amount of money focused against our financial markets through leveraged derivatives or cyber efforts can result in trillions of dollars in losses. And, the perpetrators can remain undiscovered.

Private sector payrolls increased 222,000 in February, the 12th consecutive monthly gain. December/January were revised up 46,000, for a net gain of 268,000. February private-sector gains were led by administrative/support services (+35,000), health care (+34,000), manufacturing (+33,000), and construction (+33,000). The largest decline was for retail (-8,000).

The unemployment rate fell to 8.9% in February from 9.0% in January.

Average weekly earnings – cash earnings, excluding benefits – were unchanged in February but up 2.3% versus a year ago.

Implications: Very good report on the labor market this morning. Including upward revisions to prior months, non-farm payrolls increased 250,000. But this includes a decline in government; private sector payrolls were up 268,000 (again, including upward revisions to prior months). The strength was confirmed by figures on civilian employment – an alternative measure of jobs that is better at picking up the self-employed and small start-up businesses – which increased 250,000 in February. Meanwhile, the increase in jobs pushed down the unemployment rate to 8.9%, the lowest in almost two years. Once again, what was particularly good about the drop in the jobless rate was that it was all due to full-time workers, showing that employers are getting more confident. In fact, the net share of private industries adding jobs was at the highest level since 1998. Getting into the details of the report, we see signs of a recovery in home building: in the past two months, residential construction payrolls have increased 19,000, the most since early 2006. Although average hourly earnings were unchanged in February, the number of hours worked increased 0.2%. As a result, total cash earnings for workers increased at a healthy 3.2% annual rate in February and are up 3.7% in the past year. So far, this is more than enough for workers, as a whole, to keep up with inflation. Given better economic news on both manufacturing and service output, as well as auto sales and chain store sales, the underlying trend in job growth will continue to accelerate in the months ahead.

Woof, Where did the big brains that Obama got to work on the economy and the stimulus, get the idea that they had big brains? Unless maybe they do have big brains and they are using them to destroy our economy.

So, the guy behind the world’s largest bond fund is dumping U.S. government debt.

Got your attention yet?

Bill Gross of Pacific Investment Management Co. (PIMCO) is no great fan of U.S. government debt to start with: His fund also zeroed out its holdings of Uncle Sam’s IOUs back in 2009, but had added some back into the portfolio. No more. He’s not buying what Washington is selling, and he’s urging others to dump U.S. bonds, too. Bloomberg reports:

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old-fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.

So, what’s wrong with U.S. government debt? With deficits running at insane levels but interest rates still low, the risk-reward ratio is out of whack, even compared to “emerging-market” countries — read: those Third World regimes whose farcical finances we used to regard with a mixture of scorn and pity, until we began emulating them. All the money-printing down at the Fed is taking a toll:

Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

What this means, of course, is pressure on the U.S. government to offer higher interest rates on its bonds. Gross says that the rates need to go up about 1.5 percent to reflect market realities. And market realities, ignored for the past few years, are going to start reasserting themselves as “quantitative easing” ends and the Fed stops buying U.S. debt that the markets don’t want.

As things stand, interest on the debt (at about 6 percent of all federal spending) is equal to about one-third of all discretionary spending combined (about 19 percent of the budget). Current forecasts have debt-service costs alone amounting to nearly $1 trillion by 2020, consuming 20 percent of all federal tax revenues. That’s a vicious circle: Bigger deficits add to the total debt, which drives up the cost of debt service, which creates bigger deficits, shampoo, rinse, repeat, and wake up in Argentina circa 1999–2002.

Which gets us back, as usual, toward the one inevitable, undeniable fact of American life at this moment: The major entitlement programs — Social Security, Medicare, Medicaid — other “mandatory” spending, national defense, and interest on the debt make up more than 80 percent of federal spending. Everything else put together accounts for less than $1 in $5 of government outlays. Assuming we don’t default on our national debt, interest on the debt is the one spending item that is truly off the table. Even if we cut national-defense spending to zero, that would only get us just over halfway toward eliminating the trillion-dollar deficit headed our way in 2012. (We aren’t cutting national-defense spending to zero.) Meaning that major reform of the entitlement programs is not optional. It is do or die.

Bernanke & Co. have baked inflation into this cake, and catastrophic state and local finances mean that Washington really can’t pass off its spending schemes onto the governors, mayors, and state legislatures.

You may think the Ryan Roadmap looks harsh and disruptive. But we simply must start dealing with these things right now, while we have some resources, some options, and some time. It will be much more harsh and disruptive to try to deal with these things after the fiscal crisis is upon us, when inflation is skyrocketing, unemployment is through the roof, and the markets start demanding a very high premium to finance the debt of Washington, the states, and the cities, if indeed investors are willing to do so at all.

We are in an extraordinarily dangerous period, one that calls for real leadership in Washington, where the geniuses in charge are currently locked in a death struggle over whether to cut nothing or next to nothing.

NPR? Foreign aid? Food stamps? That isn’t going to do it. The fact that we’re even having a discussion about whether we have to federally subsidize experimental opera companies in Topeka suggests that the message has not quite hit home. Maybe when the Social Security checks stop coming, Americans will notice. Which is to say, when it’s too late.

While commodity and currency markets took the biggest immediate hit from Friday's earthquake and tsunami in Japan, the damage will be felt throughout the world's economy and the US.Fukishima Minpo | AFP | Getty ImagesA factory building has collapsed in Sukagawa city, Fukushima prefecture, in northern Japan. A massive 8.9-magnitude earthquake shook Japan, unleashing a powerful tsunami that sent ships crashing into the shore and carried cars through the streets of coastal towns.

In addition to the massive human toll, the quake and ensuing tsunami will exact an economic toll on Japan, which is still struggling to shake the detritus of its "lost decade" brought on by economic stagnation.

The price on both fronts is impossible to calculate at this point, but it no doubt will be profound.

"It's going to be of the most expensive disasters in history before it's done," Dennis Gartman, hedge fund manager and author of The Gartman Letter investor bulletin, told CNBC. "This is not just a Japanese circumstance, this is on both sides of the Pacific and the dollars are going to add up very quickly."

Here, then, is a look at five of the main financial effects of the crisis:

WASHINGTON -- While the world has been transfixed with Japan, Europe has been struggling to avoid another financial crisis. On any Richter scale of economic threats, this may ultimately matter more than Japan's grim tragedy. One reason is size. Europe represents about 20 percent of the world economy; Japan's share is about 6 percent. Another is that Japan may recover faster than is now imagined; that happened after the 1995 Kobe earthquake. It's hard to discuss the "world economic crisis" in the past tense as long as Europe's debt problem festers -- and it does.

Just last week, European leaders were putting the finishing touches on a plan to enlarge a bailout fund from an effective size of roughly 250 billion euros (about $350 billion) to 440 billion euros ($615 billion) and eventually to 500 billion euros ($700 billion). By lending to stricken debtor nations, the fund would aim to prevent them from defaulting on their government bonds, which could have ruinous repercussions. Banks could suffer huge losses in their bond portfolios; investors could panic and dump all European bonds; Europe and the world could relapse into recession.

Unfortunately, the odds of success are no better than 50-50.

Europe must do something. Greece and Ireland are already in receivership. Private investors won't buy their bonds at reasonable rates. There are worries about Portugal and Spain; Moody's recently downgraded both, though Spain's rating is still high. The trouble is that the sponsors of the bailout fund are themselves big debtors. In 2010, Italy's debt burden (the ratio of its government debt to its economy, or gross domestic product) was 131 percent; that exceeded Spain's debt ratio of 72 percent. Debt ratios were high even for France (92 percent) and Germany (80 percent).

It is disturbing to see the Broken Window fallacy being regurgitated so often in the wake of the Japanese earthquake/tsunami/nuclear disaster. The fallacy, coined by the great French satirical economic journalist Frederic Bastiat, refers to the boneheaded notion that a broken window is an economic boon since it provides work for the Acme Glass Company. This ignores the cost to the owner of the window, who now has to pay again for something he already had. Similarly, numerous pundits have declared that the destruction in Japan — which is estimated at between US$200-billion and US$300-billion — has a “silver lining” since it requires massive amounts of rebuilding. This, they claim, will provide a “stimulus” to the Japanese economy, and spillover benefits to other countries.

Rebuilding will indeed boost demand for all sorts of products and services, and some individual companies will undoubtedly benefit from new orders related to the disaster. However, the notion that there might be a net economic benefit represents economic illiteracy of the highest order. It is analogous to suggesting that Libyans should rejoice at the potential economic boost from their country being bombed. Such illiteracy has a name. It is called Keynesianism.

While our hearts must go out to those displaced and grieving the dead from this calamity, we should not forget that the Japanese economy has certainly not suffered two “lost decades” because of lack of government intervention. Until the end of the 1980s the Land of the Rising Sun was the darling of reflexive statists, and has always been a model of beggar-thy-neighbour mercantilism, a protectionist export-booster whose demographic future is darker because of its aging population and restrictive immigration policies. Meanwhile, its nuclear program was also rooted in delusive notions of energy autonomy. The Japanese national debt is twice its GDP, worse than that of any subprime European government. Reconstruction means even more government debt, plus the diversion of resources from other productive activities. The repatriation of Japanese funds — which has led to a soaring yen and G7 intervention — and disruptions to Japanese industrial demand and global manufacturing supply chains, while not of major statistical significance to the global economy, certainly won’t help. Indeed, they may cause more-than-marginal losses in major trading partners such as Australia.

Every time I get panhandled I offer to walk the panhandler to the nearest restaurant and offer to help them apply for a job as a dishwasher. Never been taken up on it, but believe handing 'em money doesn't do them any favors, either, as this piece explains.

March 25, 2011 04:57 PM UTC by John StosselFreeloading Doesn't Help the FreeloadersNo group has been more "helped" by the American government than American Indians. Yet no group in America does worse.

Almost a quarter of Native Americans live in poverty. 66 percent are born to single mothers. They have short life spans. Indian activists say the solution is -surprise- more money from the government. But Washington already spends about $13 billion on programs for Indians every year.

There are special programs in 20 different Departments and Agencies: Empowering Tribal Nations Initiative, Advancing Nation to Nation Relationships, Protecting Indian Country, Improving Trust Land Management, New Energy Frontier Initiative, Climate Change Adaptation Initiative, Construction, Improving Trust Management, Tribal Priority Allocations, Resolving Land and Water Claims, Indian Land Consolidation Program. This is just a partial list.

But that's still not enough for Indian activists. In my Fox News Special "Freeloaders" (10 pm ET tonight), Elizabeth Homer, who used to be the U.S. Interior Departments Director of American Indian Trust, argues the government must do more.

I say government already does too much. Indians would be better off without government handouts. I have evidence: tribes not recognized by the federal government, tribes that get no special help, often do better.

Members of the Lumbee tribe from Robeson County, NC, own their own homes. They succeed in business. Lumbee tribe members include real estate developer Jim Thomas, who used to own the Sacramento Kings. Lumbee Jack Lowery helped start the Cracker Barrel Restaurants. Lumbees started the first Indian owned bank, which now has 12 branches.

The political class doesn't understand that its independence, not government management, that allows people to prosper. Congressman Mike McIntyre (D-NC) is pushing a bill called the Lumbee Recognition Act. This bill would give the Lumbees the same "help" that other tribes get. That would give the Lumbees about $80 million a year.

"We shouldn't take it!" says Lumbee Ben Chavis, another successful businessman. Chavis says not getting any handouts is what makes his tribe successful, and if the federal money starts coming, members of his tribe "are going to become welfare cases. Its going to stifle creativity. We don’t need the government giving us handouts."

I listened to Brian Wesbury on the radio this evening; he has been ripped pretty hard here lately for his positive forecasts. His politics are diametrically opposite to Obama's, similar to mine. Given that, his optimism under Obama's policies is puzzling. I picked up a couple of points he made. Our total assets are 155 Trillion, he says, not counting infrastructure. Our income (GDP) is 15 T. Our deficit is 1.5T/yr, presumably shrinking. Debt is 14T going to 16, etc. He asks in simple terms: If you had the opportunity to inherit 155 million (or thousand or hundred) but it had liabilities of 16 million, would you take it? He basically thinks we face the same debt doom and gloom that GM and others warn; he just thinks we are a few years further from the precipice and more likely to break out and solve this. He thinks equity investors should be long (invested) because stocks are undervalued and you will miss the takeoff if you are out. I take the last part with a grain a salt a) because he works for an investment company and b) because it relates to the future which is a known unknown. Personally I am 100% neutral on the question of whether other people should have their money in or out of the market. -----------------------------Economist Alan Reynolds has perhaps been reading the forum: "Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP—8% and 18%, respectively— regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP."

"Mr. Obama's hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed."

Obama's Soak-the-Rich Tax Hikes Won't WorkIncome tax revenues have been remarkably stable at 8% of GDP, regardless of tax rates. The way to increase revenue is to grow the economy.

By ALAN REYNOLDS

President Obama's response to congressional efforts to curb runaway federal spending is to emphasize, once again, his resolve to greatly increase tax rates on married couples whose joint incomes are above $250,000. This insistent desire to raise taxes—which he repeated in a speech yesterday while complaining about "trillions of dollars in . . . tax cuts that went to every millionaire and billionaire in the country"—is a distraction. It won't solve our nation's fiscal problem.

Preliminary estimates from the Congressional Budget Office (CBO) project that federal spending under the president's 2012 budget plan would average 23.3% over the coming decade—up from 19.7% in 2007 and 18.2% in 2001.

Even if the president could persuade Congress to enact all of his proposed tax increases, in addition to surtaxes already included in ObamaCare, the CBO finds we would still face endless budget deficits averaging 4.8% of GDP.The Deficit Speech

"Federal debt held by the public would double under the President's budget," says the CBO, "growing from $10.4 trillion (69% of GDP) at the end of 2011 to $20.8 trillion (87% of GDP) at the end of 2021, adding $9.5 trillion to the nation's debt from 2012 to 2021."

And yet, enormous as they are, these deficit and debt estimates assume that the higher tax rates called for under the president's 2012 budget plan do no harm to the economy, that interest rates stay unusually low, and that the economy avoids recession for a dozen years. Those assumptions require taxpayers to behave much differently than they ever have before.

The revenue estimates are even more unbelievable. According to the Office of Management and Budget, total revenues would supposedly exceed 19% of GDP after 2015, rising to 20% by 2021—a level briefly reached only at the height of World War II (1944-45) and the pinnacle of the tech-stock boom (2000). Moreover, these unprecedented revenues would supposedly come from the individual income tax, which is even less plausible.

It is not as though we have never tried high tax rates before. From 1951 to 1963, the lowest tax rate was 20% to 22% and the highest was 91% to 92%. The top capital gains tax rate approached 40% in 1976-77. Aside from cyclical swings, however, the ratio of individual income tax receipts to GDP has always remained about 8% of GDP.

The individual income tax brought in 7.8% of GDP from 1952 to 1979 when the top tax rate ranged from 70% to 92%, 8% of GDP from 1993 to 1996 when the top tax rate was 39.6%, and 8.1% from 1988 to 1990 when the highest individual income tax rate was 28%. Mr. Obama's hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed.

Federal revenue from the individual income tax exceeded 9% of GDP only eight times in U.S. history—during World War II (9.4% in 1944), the recessions of 1969-70, 1981-82 and 1991-92, and the tech-stock boom-bust of 1998-2001. Revenues were a high share of GDP during the three recessions because GDP fell.

The situation of 1997-2000 was unique. Individual income tax revenues reached an unprecedented 9.6% of GDP from 1997 to 2000 for reasons quite unlikely to be repeated. An astonishing quintupling of Nasdaq stock prices coincided with an extraordinary proliferation of stock options, which the Federal Reserve's Survey of Consumer Finances found were granted to 11% of U.S. families by 2001, and with a reduction in the capital gains tax to 20% from 28%, which encouraged much greater realization of taxable gains through stock sales. Revenues from the capital gains tax rose to 10.8% of all individual income tax receipts in 1997 and 13% by 2000. The unexpected revenue windfalls in President Bill Clinton's second term were largely a consequence of lower tax rates on capital gains.

Using IRS data, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley have estimated that realized capital gains accounted for just 13%-22% of reported income among the top 1% of taxpayers from 1988 to 2006, when gains were taxed at 28%—but that fraction swiftly reached 29%-32% in 1998-2000, when the capital gains tax fell to 20%.

The average tax rate of such top taxpayers was mechanically diluted by the greatly increased realizations of capital gains after 1997 and 2003, since a larger share of reported income consisted of capital gains. Yet the amount of taxes paid by top taxpayers reached record highs for the same reason—there was more revenue to be had from taxing many gains at a low rate than from taxing fewer gains a high rate. Nobody can be forced to sell assets in taxable accounts. To complain that a low tax on realized capital gains is "unfair" is to suggest it would be fairer for affluent investors to sit on unrealized gains, as though an unpaid tax is morally superior to one that collects billions.

As a result of the conventional confusion between tax rates and revenues, some stories in the media have abetted the delusion that the huge gap between spending and likely revenues could be narrowed by simply increasing the highest tax rates on capital gains and/or dividends.

A recent cover story in Bloomberg Businessweek by Jesse Drucker, "The More You Make, the Less You Pay," reported that, "For the well-off, this could be the best tax day since the early 1930s. . . . For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30% in 1995 to just under 17% in 2007, according to the IRS."

Among the top 400 taxpayers (rarely the same people from one year to the next), the average tax rate fell to 22.3% in 2000, when the capital gains tax was 20%, from 29.9% in 1995 when the capital gains tax was 28%. But that same IRS report also shows that real tax revenues from the top 400 more than doubled after the capital gains tax fell, rising to $11.8 billion in 2000 from $5.2 billion in 1995, measured in 1990 dollars.

The same thing happened after 2003, when the capital gains tax was further reduced to 15%. The average tax rate of the top 400 fell to 16.6% in 2007 from 22.9% in 2002. Even though there was no stock market boom as in 1997-2000, real revenues of the top 400 nevertheless doubled again—to $14.5 billion in 2007 from $6.9 billion in 2002. Instead of paying less when the capital gains tax rate went down in 1997 and 2003, the top 400 instead paid much, much more.

The trendy talking point of blaming projected deficits on "tax cuts for the rich" is flatly absurd.

Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP—8% and 18%, respectively— regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP.

Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press 2006).

I like Dick Morris. He's a very good pollster, and like me, he loathes the Clintons. That does not mean however that he does not get outside of his lane from time to time and IMHO political economics is outside his lane. While I am hostile to the IMF (see e.g. my pointing out that the bailouts of Greece and Ireland cost the US about $300B and that we should withdraw from the IMF) and DM makes some sound points regarding its make-up and distribution of power, after watching this twice I cannot tell wtf it is that has DM upset here. That announced some standards. So? Without further explication, I'm not seeing the substance.

WASHINGTON — The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.

As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.

“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.

Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.

The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.

The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially. (MARC: Oy vey!)

A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle.

The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.

As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.

But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return.

“Such purchases seem likely to have their largest effects during periods of economic and financial stress,” he said.

The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.

But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. (Marc: Duh!) Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

There isn't one thing that turns this mess around. It is the whole gamut. A weaker dollar that people wanted for the China imbalance, or a corporate tax rate lowered to 25% when no one is making a profit or paying the tax does nothing to change the fact that manufacturers have to pay four times what should for natural gas required in manufacturing or fuel required to deliver product and services or the investors face excess uncertainty and employers face growing burdens.

We are punting right now on one of the best opportunities ever to grow our economy. This recession ended in June 2009 (2 years ago!) and recoveries typically have twice the growth rate of ordinary times. Investment and job growth these last 2 years would have been an amazing help for the foreclosure situation not to mention the budget deficit. Yet we sputter.

One does not need to understand economic terms like Keynesianism to see that we currently have the wrong policy mix for what is so badly needed right now, private sector growth. Please read this Wall Street Journal editorial:

For three long years, the U.S. has been undertaking an experiment in economic policy. Could record levels of government spending, waves of new regulation and political credit allocation, and unprecedented monetary stimulus re-ignite growth? The results have been rolling in, and they represent what increasingly looks like an historic mistake that deserves to be called the Keynesian growth discount.***

The latest evidence is yesterday's disappointing report of 1.8% in first quarter GDP. At this stage of recovery after a deep recession, the economy is typically growing by 4% or more as consumer confidence returns and businesses accelerate investment as their profits revive. Yet in this recovery consumers are still cautious and business investment remains weak.

Some of the first quarter's growth slump is due to seasonal factors such as bad weather and weaker defense spending. In the silver lining department, the private economy grew faster than the overall GDP figure because government spending declined. But even maintaining the 2.9% growth rate of 2010 would mark an historic underachievement for a recovery after a recession that was as deep as the one from late 2007 to mid-2009.

The most recent recession of comparable depth and job loss was in 1981-1982, when unemployment hit 10.8%. Huge chunks of industrial America shut down and never re-opened. Yet once the recovery began in earnest in the first quarter of 1983, the economy boomed. As the nearby table shows, growth exceeded 7.1% for five consecutive quarters, and it kept growing at nearly a 4% pace for another two years. Growth didn't dip below 2% in any quarter until the second three months of 1986. This was the Reagan boom.

Now look at the first seven quarters of the current recovery. Only briefly has growth hit 5%, in the fourth quarter of 2009 as businesses rebuilt inventories that had been pared to the bone. Growth has been mediocre ever since, sputtering to a near-stall in the middle of last year, accelerating modestly late last year, and now slowing again. This recovery is as weak as the much-maligned "jobless recovery" of the last decade, which followed a mild recession and at least gained speed after the tax cut of 2003.

Most striking is that this weak growth follows everything that the Keynesian playbook said politicians should throw at the economy. First came $168 billion in one-time tax rebates in February 2008 under George W. Bush, then $814 billion more in spending spread over 2009-2010, cash for clunkers, the $8,000 home buyer tax credit, Hamp to prevent home foreclosures, the Detroit auto bailouts, billions for green jobs, a payroll tax cut for 2011, and of course near-zero interest rates for 28 months buttressed by quantitative easing I and II. We're probably forgetting something.

Imagine if President Obama had introduced his original stimulus in February 2009 with the vow that, 26 months later, GDP would be growing by 1.8% and the jobless rate would be 8.8%. Does anyone think it would have passed?

Liberal economists will blame this latest slowdown on spending cuts across all levels of government, and government spending did fall in the first quarter. But those modest declines follow the biggest government spending binge since World War II that was supposed to kick start the economy and then stop. Remember former White House chief economist Larry Summers's mantra that stimulus spending should be timely, targeted and temporary?

With deficits this year estimated to hit $1.65 trillion, are we really supposed to believe that more deficit spending will produce faster growth? Would $2 trillion do the trick, or how about $3 trillion? Two years after the stimulus debate began, the critics who said all of this spending would provide at most a temporary lift to GDP while saddling the economy with record deficits have been proven right.

The good news is that the private economy seems to have enough momentum to avoid a recession in the near term, but the danger is that growth will continue to be subpar. The evidence is that the combination of spendthrift fiscal policy and a wave of new regulatory costs and mandates are restraining business expansion and hiring.

Then there's the threat of higher tax rates on investment and business that we dodged for two years after the GOP won Congress but that President Obama has now promised for 2013 if he is re-elected. This too deters the animal spirits necessary for robust growth. The great risk is stagflation, a la the 1970s, when easy money tried to compensate for bad fiscal and regulatory policy, which led to sluggish growth, rising prices and declines in real wages.***

The contrast in results between the current recovery and the Reagan years is instructive because the policy mix was so different. In the 1980s, the policy goals were to cut tax rates, reduce regulatory costs and uncertainty, let the private economy allocate capital free of political direction, and focus monetary policy on price stability rather than on reducing unemployment. This is the policy mix we need to rediscover if we are going to escape our current malaise and stop suffering from the Keynesian discount.

Peter Ferrara / Forbes makes a familiar point about the current, failed policy mix, with great summary, analysis, comparison and extensive facts and figures. Obama like to compare himself with Reagan. I think that will backfire.

In February 2009 I wrote an article for The Wall Street Journal entitled “Reaganomics v Obamanomics,” which argued that the emerging outlines of President Obama’s economic policies were following in close detail exactly the opposite of President Reagan’s economic policies. As a result, I predicted that Obamanomics would have the opposite results of Reaganomics. That prediction seems to be on track.

When President Reagan entered office in 1981, he faced actually much worse economic problems than President Obama faced in 2009. Three worsening recessions starting in 1969 were about to culminate in the worst of all in 1981-1982, with unemployment soaring into double digits at a peak of 10.8%. At the same time America suffered roaring double-digit inflation, with the CPI registering at 11.3% in 1979 and 13.5% in 1980 (25% in two years). The Washington establishment at the time argued that this inflation was now endemic to the American economy, and could not be stopped, at least not without a calamitous economic collapse.

All of the above was accompanied by double -igit interest rates, with the prime rate peaking at 21.5% in 1980. The poverty rate started increasing in 1978, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982. In addition, from 1968 to 1982, the Dow Jones industrial average lost 70% of its real value, reflecting an overall collapse of stocks.

President Reagan campaigned on an explicitly articulated, four-point economic program to reverse this slow motion collapse of the American economy:

1. Cut tax rates to restore incentives for economic growth, which was implemented first with a reduction in the top income tax rate of 70% down to 50%, and then a 25% across-the-board reduction in income tax rates for everyone. The 1986 tax reform then reduced tax rates further, leaving just two rates, 28% and 15%.

2. Spending reductions, including a $31 billion cut in spending in 1981, close to 5% of the federal budget then, or the equivalent of about $175 billion in spending cuts for the year today. In constant dollars, nondefense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in constant dollars, this nondefense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms! Even with the Reagan defense buildup, which won the Cold War without firing a shot, total federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989. That’s a real reduction in the size of government relative to the economy of 10%.

4. Deregulation, which saved consumers an estimated $100 billion per year in lower prices. Reagan’s first executive order, in fact, eliminated price controls on oil and natural gas. Production soared, and aided by a strong dollar the price of oil declined by more than 50%.

These economic policies amounted to the most successful economic experiment in world history. The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990, when the tax increases of the 1990 budget deal killed it. This set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.

During this seven-year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third-largest in the world at the time, to the U.S. economy. In 1984 alone real economic growth boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%. Unemployment fell to 5.3% by 1989.

The shocking rise in inflation during the Nixon and Carter years was reversed. Astoundingly, inflation from 1980 was reduced by more than half by 1982, to 6.2%. It was cut in half again for 1983, to 3.2%, never to be heard from again until recently. The contractionary, tight-money policies needed to kill this inflation inexorably created the steep recession of 1981 to 1982, which is why Reagan did not suffer politically catastrophic blame for that recession.

Real per-capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20% in just seven years. The poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak. The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade.

In The End of Prosperity, supply side guru Art Laffer and Wall Street Journal chief financial writer Steve Moore point out that this Reagan recovery grew into a 25-year boom, with just slight interruptions by shallow, short recessions in 1990 and 2001. They wrote:

We call this period, 1982-2007, the twenty-five year boom–the greatest period of wealth creation in the history of the planet. In 1980, the net worth–assets minus liabilities–of all U.S. households and business … was $25 trillion in today’s dollars. By 2007, … net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.

What is so striking about Obamanomics is how it so doggedly pursues the opposite of every one of these planks of Reaganomics. Instead of reducing tax rates, President Obama is committed to raising the top tax rates of virtually every major federal tax. As already enacted into current law, in 2013 the top two income tax rates will rise by nearly 20%, counting as well Obama’s proposed deduction phase-outs.

The capital gains tax rate will soar by nearly 60%, counting the new Obamacare taxes going into effect that year. The total tax rate on corporate dividends would increase by nearly three times. The Medicare payroll tax would increase by 62% for the nation’s job creators and investors. The death tax rate would go back up to 55%. In his 2012 budget and his recent national budget speech, President Obama proposes still more tax increases.

Instead of coming into office with spending cuts, President Obama’s first act was a nearly $1 trillion stimulus bill. In his first two years in office he has already increased federal spending by 28%, and his 2012 budget proposes to increase federal spending by another 57% by 2021.

His monetary policy is just the opposite as well. Instead of restraining the money supply to match money demand for a stable dollar, slaying an historic inflation, we have QE1 and QE2 and a steadily collapsing dollar, arguably creating a historic reflation.

And instead of deregulation we have across-the-board re-regulation, from health care to finance to energy, and elsewhere. While Reagan used to say that his energy policy was to “unleash the private sector,” Obama’s energy policy can be described as precisely to leash the private sector in service to Obama’s central planning “green energy” dictates.

As a result, while the Reagan recovery averaged 7.1% economic growth over the first seven quarters, the Obama recovery has produced less than half that at 2.8%, with the last quarter at a dismal 1.8%. After seven quarters of the Reagan recovery, unemployment had fallen 3.3 percentage points from its peak to 7.5%, with only 18% unemployed long-term for 27 weeks or more. After seven quarters of the Obama recovery, unemployment has fallen only 1.3 percentage points from its peak, with a postwar record 45% long-term unemployed.

Previously the average recession since World War II lasted 10 months, with the longest at 16 months. Yet today, 40 months after the last recession started, unemployment is still 8.8%, with America suffering the longest period of unemployment that high since the Great Depression. Based on the historic precedents America should be enjoying the second year of a roaring economic recovery by now, especially since, historically, the worse the downturn, the stronger the recovery. Yet while in the Reagan recovery the economy soared past the previous GDP peak after six months, in the Obama recovery that didn’t happen for three years. Last year the Census Bureau reported that the total number of Americans in poverty was the highest in the 51 years that Census has been recording the data.

Moreover, the Reagan recovery was achieved while taming a historic inflation, for a period that continued for more than 25 years. By contrast, the less-than-half-hearted Obama recovery seems to be recreating inflation, with the latest Producer Price Index data showing double-digit inflation again, and the latest CPI growing already half as much.

These are the reasons why economist John Lott has rightly said, “For the last couple of years, President Obama keeps claiming that the recession was the worst economy since the Great Depression. But this is not correct. This is the worst “recovery” since the Great Depression.”

However, the Reagan Recovery took off once the tax rate cuts were fully phased in. Similarly, the full results of Obamanomics won’t be in until his historic, comprehensive tax rate increases of 2013 become effective. While the Reagan Recovery kicked off a historic 25-year economic boom, will the opposite policies of Obamanomics, once fully phased in, kick off 25 years of economic stagnation, unless reversed?

Retail sales increased 0.5% in April (1.1% including large upward revisions to February/March). The consensus had expected a gain of 0.6%. Retail sales are up 7.6% versus a year ago.

Sales excluding autos were up 0.6% in April (1.0% including upward revisions to February/March). The consensus expected a gain of 0.6%. Retail sales ex-autos are up 6.9% in the past year.

The increase in retail sales for April was led by gas stations and grocery stores. There were no signficiant declines in any category of sales.

Sales excluding autos, building materials, and gas increased 0.2% in April and were up 0.5% including revisions for February/March. These sales are up 5.5% versus last year. This calculation is important for estimating GDP.

Implications: The US consumer is on a roll. Retail sales increased for the tenth straight month in April – the longest winning streak since the late 1990s – and are up 7.6% versus a year ago. Including upward revisions for prior months, overall sales were up 1.1% in April and 1% excluding autos. This was not all fueled by higher gas prices. Not even close. “Core” sales (which exclude autos, building materials, and gas) were up a solid 0.5% including upward revisions to prior months. Even if these sales are completely unchanged for the rest of the second quarter they will still be up at a roughly 4% annual rate in Q2. Auto sales, which took a breather last month after eight straight monthly increases, bounced back in April and were revised higher for prior months as well. Consumer spending is rising for two main reasons. First, earnings are growing due to more jobs, more wages per hour, and more hours per worker. Second, due largely to debt reductions, consumers’ financial obligations (debt service plus other recurring payments like rent, car leases, homeowners’ insurance, and property taxes) are now the smallest share of disposable income since 1995. All of this bodes well for spending in the months to come.

Reagan is an Icon of the right, but even he saw the necessity of raising taxes. As did other pragmatic Republicans.

It seems Tom Coburn is also rather pragmatic.

"Sen. Tom Coburn, a staunch conservative from Oklahoma, triggered a heated debate among conservatives when he acknowledged that tax increases might be necessary if Congress really wants to reduce the deficit."

Reagan raised taxes by 100% in the 1980s. Those were REVENUES not rates.

I know that liberal punditry is full of accusations that he raised taxes many times - many more times than he cut them, but they were all examples of closing loopholes to get and keep marginal rates lower. (Please show me an example of where that was not true!)

After all the "raising", tax rates went from 70% to 28%. What a bunch of BS. JDN, as our valued centrist, we want you to sniff out when either side is lying, not just be our devil's advocate.

In George H.W. Bush famous break of his promise that cost him his job, he was talked into only $1 of tax hike for every $2 of spending cuts. Pretty good compromise with a DEMOCRATIC congress, don't ya think? Guess what? The tax hikes kicked in like clockwork, virtually irreversible, and the spending cuts never happened. Who knew?!? Sort of like what Obama and company want to do now.

Let's say Republicans cave today on their promises and principles and go along with a similar, so-called compromise. How much lower will spending be, in dollars, in total, in future years, after tax rates go up on the wealthy, on employers and on investments?

I think we all know the answer. Tax hikes, if approved, will happen. Spending cuts won't.

I look upon my role as the "valued centrist" and maybe "devil's advocate". There are plenty of people on this site that will sniff out any lies or discrepancies with their own beliefs.

As for Bush, sorry he lost his job. The compromise he formulated seems fair to me. I'm all for nailing down the agreed spending cuts in exchange.

As for Reagan, I'm a big fan. He did a lot of good, but he also compromised to achieve his objectives (I think that is good). I understand, he lowered income taxes, but he raised a lot of "taxes" too.....

"Reagan raised taxes not once but 6 times and the increase in 1983 was the largest in history at that time.In 1982 alone, he signed into law not one but two major tax increases. The Tax Equity and Fiscal Responsibility Act (TEFRA) raised taxes by $37.5 billion per year and the Highway Revenue Act raised the gasoline tax by another $3.3 billion.According to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history. An increase of similar magnitude today would raise more than $100 billion per year.In 1983, Reagan signed legislation raising the Social Security tax rate. This is a tax increase that lives with us still, since it initiated automatic increases in the taxable wage base. As a consequence, those with moderately high earnings see their payroll taxes rise every single year.In 1984, Reagan signed another big tax increase in the Deficit Reduction Act. This raised taxes by $18 billion per year or 0.4 percent of GDP. A similar-sized tax increase today would be about $44 billion.The Consolidated Omnibus Budget Reconciliation Act of 1985 raised taxes yet again. Even the Tax Reform Act of 1986, which was designed to be revenue-neutral, contained a net tax increase in its first 2 years. And the Omnibus Budget Reconciliation Act of 1987 raised taxes still more."

I don't really see how the end of QE2 can't be a big deal, but David Malpass does:===========================

Concerns about the end of QE2 have put downward pressure on equities and bond yields. We think this will ease.

We expect the consensus outlook to improve as it did in the face of Y2K. Like the June 30 end of QE2, Y2K crash warnings had a date certain, January 1, 2000, to worry about, causing months of hand-wringing due to the uncertainty. Equities ended up rallying over 15% in the final three months of 1999 and went higher in following months. We expect a substantial flow from bonds to equities in coming months as the growth outlook improves, inflation rises and the uncertainty over the end of QE2 is finally resolved.

The $16 billion 30-year bond auction had the weakest number of bids per bond since November. We think this signals a decline in risk aversion and a weakening of the bond squeeze that has dominated bond yields in recent weeks (see Bond Squeeze Nearly Over on May 3.) Short-term interest rates and Treasury bond yields were being squeezed down by what we think were temporary factors, giving a false impression of market-based pessimism and risk aversion and a disconnect between falling bond yields and rising equities. Several factors caused what we think was an artificial month-long decline in bond yields from April 11 through May 6 including the April risk that the $14.3 trillion debt limit might have suspended Treasury issuance while the Fed was still buying heavily – but due to strong April tax receipts and technical factors, Treasury now has headroom to continue regular deficit funding into August, lifting the squeeze (see a list of the temporary squeeze factors in the attachment).

The April low point in the consensus outlook had a long list of concerns beyond QE2 and falling bond yields. These included the oil price spike, the ECB’s rate hike on April 7, Japan’s severe crisis, China’s aggressive monetary tightenings, the first quarter weather-related letdown in U.S. GDP and the deterioration in peripheral European debt markets. While each of this is a negative, we don’t think they will derail the global expansion, leaving room for an improvement in the outlook (see Tall Wall of Worry; Good Second Half Outlook on April 15.)

We note several positive developments:

Retail stocks are rising. Consumer credit has increased six months in a row (through March) after 20 months of shrinkage. We disagree with the view that consumer debt will constrain consumption – the key variable in consumption is the employment climate which is gradually improving. Today’s retail sales data was a bit weaker-than consensus, but there were upward revisions to previous months and the net result is consistent with our expectation of over 3% real growth in the second quarter. Retail sales are up 7.6% yoy. Excluding autos, gas and building materials (which is an input for GDP), sales are up 5.5% yoy.

April tax receipts were strong. This suggests economic strength. More importantly, it helped Treasury delay the debt limit problem beyond the Fed’s final QE2 bond purchases in June. We think the timing change for the debt limit increase broke the bond squeeze and will reduce the sensitivity of financial markets to the debt limit increase.

April payroll data was strong, consistent with today’s sizeable upward revisions in February and March retail sales data.

Bearish sentiment and continuing confusion about QE2 provides upside – for example, some analysts are asserting that M2 growth will drop when QE2 ends because that Fed will stop increasing excess reserves (yet excess reserves aren’t part of M2).

We expect the U.S. to continue very loose monetary and fiscal policy – meaning a near-zero Fed funds rate and over $3.7 trillion per year in federal spending. We look for a moderate 3%-3.5% U.S. growth rate in coming quarters -- that’s disappointing given the severity of the recession and won’t create the surge in small-business jobs needed to pull the unemployment rate quickly below 8% but is fast enough to dispel the QE2 concerns and QE3 predictions. David MalpassDavid Malpass is President of Encima Global and GrowPAC.com. He also served in the Reagan Treasury Dept, the Bush (41) State Dept and was Chief Economist at Bear Stearns.

Reading between the lines, Malpass is saying (IMO) that QE1 and QE2 will be followed by QE-unspecified. We aren't changing Fed Chairmen and we aren't changing directions: "We expect the U.S. to continue very loose monetary and fiscal policy – meaning a near-zero Fed funds rate and over $3.7 trillion per year in federal spending." The Fed still thinks its half-mission is to manage/cure unemployment.

Our economy has a fine 8 cylinder engine with maybe 4 or 5 cylinders firing and partly bald tires. It is making noises and bellowing out smoke (unemployment, deficits, govt. dependency, etc.) Malpass is saying it should keep on sputtering up to the next exit, not purr down the freeway coast to coast on cruise control. We are not even ahead of breakeven 'growth' or in any condition to withstand an unforeseen storm.

This economy IMO with all this idle capacity is capable of probably 8+% sustained growth right now if the full range of pro-private-sector-growth policies were implemented. (I think Malpass would agree with that.) The recession technically ended June 2009, two years ago, and nothing resembling a recovery (growth significantly above about 3.1% breakeven growth) has begun to occur. This stagnation presents an amazing opportunity for the next President and the next election cycle if people can get their thinking straight and survive the next 1 1/2 years.

My prediction past QE2 in June is neutral. I have no idea what a car running on half its cylinders and refusing a tune up will do next.

My brother knows cars better than me. If I tell him that I felt the sputtering, heard the noises and saw the smoke but kept driving, hoping it would get better on its own, he gives me the stupid look and asks: Really?? When did that work for you?

"I don't understand how the end of QE2 can not mean the beginning of strong increases in interest rates."

Agree- if that meant an impending tightening of money. I believe he is saying/predicting that quantitative expansion, no matter what it is called, or if it is hidden or denied, will continue.

Paul Volcker in 81-82 tightened money before the productive incentives of Reagan-Kemp-Roth kicked in and the economy tanked. Bernanke has shown no inclination of heading down that path. In fact he said the opposite. The dual mandate to him means that unemployment is of equal importance to the value of the dollar.

Back to Jdn's reply to me recently, repeating and clarifying: HW Bush did not compromise. He was duped. The Tefra Reagan example witht eh wikipedia description of it is not an example of raising tax rates similar to what Dems want now. After and including Tefra, rates under Reagan dropped from 70% to 28% and revenues exploded. To discuss this intelligently, we will need to obsessively distinguish between the following:

a) tax rates applied to income earned

b) tax revenues - actual, and

c) the BS static analysis calculations made by idiots in high places who use super computers to assess policy impact but put in the false assumption that incentives and disincentives have no affect on economic behavior.

I"m not one to throw stones at Reagan, but I'm a simple guy; if more is going out of my pocket, that's a tax increase.

Take Social Security for example, Reagan raised the base, therefore wage earners above the base had to pay higher taxes. What is the difference between this "tax" and a small percentage raise on income taxes for high earners? The net is the same.

Take away my deductions, and in essence you have raised taxes; Reagan did this too. For example, if we do away with the home mortgagededuction (a good idea I say) isn't that a tax increase to American's owning a home?

I think George W Bush put it this way: "You keep more of your own money."

In both cases, people ignore the effects of marginal rates and incentives and disincentives, that is... the amount you would keep of what you make on the next dollar of income, instead talk about divvying up the slices of a fixed pie.

It isn't a zero-sum, fixed pie economy. Income, in the aggregate, is not a fixed amount to divide. If you can't see that in decades of looking at varying policies tied to widely ranging results, I don't know how to make you see it.

To those who deny the role that incentives play in policy and in the economy, I have no way (beyond the hundreds and hundreds of posts) of trying to persuade you.

Reagan's domestic spending, BTW, was his compromise. You write and link about his spending without acknowledging that all that spending came out of a Dem congress and that he sold 1/3 of his soul to get what he needed on tax rate reductions, economic turnaround and military readiness to compete with and bring down an existence threatening enemy.

JDN, you are roughly my age and lived through those same times. If you think Reagan wanted to grow the size and power of government over people's lives or are willing to make that false inference, I once again do not know how to make you see it differently.

Doug, perhaps/obviously I don't express myself. Overall, I think we agree more than you think. And I think many in the middle do as well.We just need to be persuaded.

"To those who deny the role that incentives play in policy and in the economy..." I agree with your point, and I think most Americans do too. Incentives are anintergal part. That said, I think packaging is important. Reagan did a great job of selling and packaging.

Yes, Reagan "sold 1/3 of his soul to get what he needed on tax rate reductions...." and that is what I love about him. He kept hisbasic principles, but he compromised to achieve 2/3's of those goals. Not bad in my opinion. His (positive) legacy lives on.

Why not give and take a little? Taxes? Amnesty? Etc. Reagan did...

And you are probably right, we are roughly the same age, both midwestern boys and have lived through the same times. Andwe both believe America can do better than it is doing now. But midwesterners compromise, they try to get along with their neighbors; they join together to solve problems;I wish Congress would do the same.